The UK’s top eight banks could withstand a near tripling of national unemployment, a sharp fall in property prices and a large economic contraction, the Bank of England said on Monday evening, as it gave lenders a clean bill of health almost two years into the coronavirus pandemic.
The findings were the result of the first stress test of the UK’s biggest lenders in two years after the 2020 assessment was cancelled due to the pandemic. The exercise did not specifically examine the impact of the Omicron variant but officials said they had considered a much more severe pandemic scenario than that which played out for most of 2021.
The BoE said it would reintroduce a requirement for banks to keep a special rainy day fund, known as the “countercyclical buffer” — a requirement that was suspended in 2020 to give banks headroom to keep lending even if the pandemic triggered large losses.
The tests were created in the aftermath of the financial crisis as an early-warning system so regulators could force banks to cut shareholder payouts, raise money from investors or take other actions if an imagined crisis would leave them in need of a bailout.
The central bank assessed Royal Bank of Scotland, HSBC, Barclays, Standard Chartered, Lloyds, Santander, Nationwide and Virgin Money, which was included for the first time. It is the fifth time in succession that all the banks passed without being ordered to take any action since the annual resilience assessment began in 2014.
All eight banks were tested against a doomsday scenario including an £800bn hit to UK GDP between 2020 and 2022, UK unemployment peaking at 12 per cent and a 33 per cent fall in UK residential and commercial property prices over the same period.
In contrast, the pandemic has led to a cumulative hit to GDP of less than £300bn, while the latest unemployment rate for the three months to September was 4.3 per cent. UK house prices have recorded their fastest quarterly price rise in 15 years, though commercial property prices have fallen as the pandemic pushed people out of offices and urban centres.
“The UK banking system has weathered the pandemic well,” said Andrew Bailey, Bank of England governor. He said the test included “a much more severe evolution of the pandemic and consequent economic shock”, such as £70bn of additional loan losses, far higher than the £20bn of related charges the banks took last year.
The BoE found that the banks had improved their capital positions over 2020. “Now is the right time to start rebuilding resilience so that we are well prepared for future shocks,” Bailey said, as announced the reintroduction of the countercyclical buffer — each bank will have to bring it back up to half its pre-Covid levels by December 2022.
The banks are holding far more capital than they are required to, and so they will not have to raise cash or cut dividends to meet the new requirement.
The central bank, however, said it would not loosen standards for mortgage lending, although it would consult next year on whether existing affordability limits were appropriate.
The rules, which have been in place since 2014, include a loan-to-income measure that caps most mortgages at no more than 4.5 times the applicants’ income. Borrowers must also demonstrate that they can make repayments if interest rates rise by 3 percentage points.
The central bank’s latest analysis showed that mortgage debt to income has been stable since the measures were introduced in 2014, suggesting that the restrictions protect against an increase in household indebtedness. Earlier this year the bank found that the rules were constraining an estimated 2 per cent of renters from buying a mid-priced property in their area.
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